Changes in banking, reliance on monetary policy, and Hillary Clinton’s biggest mistake

By Robert Field

Noble Award laureate Joseph E. Stiglitz writes in “the Euro, How A Common Currency Threatens The Future of Europe”:

Concerning modern banks “By some accounts, their ‘real’ lending amounts to just 3 percent of their activities; by others, to some 15 percent. But by any account, bank finance has been absorbed in other directions.”

At the age of about 26 and with modest earnings, I walked into the Rittenhouse Square office of Continental Bank and asked the manager for a $5,000 loan to use for a deposit for an option I wanted to acquire on land for the purpose of seeking re-zoning and selling to builders.

Then and there, he wrote out a promissory note, asked me to sign it, and deposited the funds into my account.   There was no request or expectation for collateral as security that the loan would be repaid.

About 65 years later and wealthy, a senior vice-president of PNC and I would laugh about how he hadn’t the authority to do the same… in fact to loan even $10. Others would have to analyze and approve any loan. Moreover, any lending had to be fully collateralized.

In my early thirties when I sought Bank and Savings and Loan financing amounting to tens of millions in today’s inflated currency, lending institutions were restricted to doing business in their region. Their boards of directors and finance committees were made up of local business people and community leaders.   They defined twin tasks: Earning money for their investors and stimulating the local economy by making funds available for needed growth.

In the relatively rare case when we were turned down for construction and permanent loan financing, it likely was because they did not feel that the project would work in their particular market place.

A popular saying of those days was “You can’t stop progress.”   I haven’t heard that in perhaps thirty years!

Bank and Saving Banks financing is still available after numbers have been crunched by special sectors of lending institutions, appraisals made, and adequate collateral posted.   But today’s lenders would much prefer to re-finance existing real estate with proven cash flows (which creates no new employment) and to sell their services such as for administrating trust funds and pension plans.

Banks can borrow money for almost no interest from the Federal Reserve and take little risk in lending it out.   (For years banks have been able to borrow money from the Federal Reserve Bank and then invest it in government bonds and Treasury Bills that pay higher interest rates, a risk free way to make money.)

And the least consideration of modern lending is what a loan will do for a specific locale, such as putting people to work.   Rather bank lending flees from distressed areas.

As Stiglitz points out elsewhere and as NewsLanc has expressed many times over the past eight years, reliance by the federal government on monetary policies generating low interest rates rather than on fiscal stimulus that would build essential infrastructure and put people back to work has led to the further enrichment of the already wealthy and vastly enlarged the earnings gap between the upper one percent and the rest of the population

It would be hypocritical of us not to acknowledge that reliance strictly on monetary policy has driven down our average interest rates on our holdings by at least 3% per annum, thus generating windfall earnings and greatly enhancing market value, We did nothing to earn this. The result wasn’t even the creation of a single new job. And our experience is the same as what happened throughout the economy.  The same low interest rates led to the boom in the stock market, again disproportionately benefiting the top one percent in wealth.

(We should also acknowledge that the extraordinary inflation during the Carter Administration in the late 1970’s vastly increased the value of our assets while mortgage debt at relatively very low interest rates remained fixed.  Runaway inflation unfairly benefits borrowers at the expense lenders.)

President Donald Trump has pledged to invest heavily in infrastructure. Taking him for his word, this comes many years too late.   As worthy as such projects are, we especially needed these projects when unemployment was at or near double digits.   In today’s relatively full employment economy, such expenditures will crowd out other worthy investments or generate inflation.  (Not necessarily a bad thing if it doesn’t exceed 2% to 3% per year.)

Hillary Clinton’s biggest campaign mistake was running against Donald Trump rather than the irresponsible Republican Congress that refused to enact much needed financial stimulus. This allowed the Republicans to place the blame for the slow recovery on the Obama administration, rather the blame being placed where it belonged.

Updated: February 4, 2017 — 2:30 pm © 2016